17 September 2010

BSA's Piracy Numbers: Less than They Seem

You can argue all you want with words, which are vague and fuzzy, but numbers have hard edges: numbers are facts. Except, of course, they aren't. Numbers that relate to the real world have to be produced, somehow, and although the end-result may be an inarguable number, the assumptions that lead to that number are just as arguable as any wordy persiflage.

But people often forget this, and take numbers at face value. A case in point is the Digital Economy Act, where alleged numbers about the “scale” of piracy were regular quoted by supporters of the bill. Those numbers came from a number of sources, but the ones most used were contained in a report called “Building a Digital Economy” from the International Chamber of Commerce (ICC). I spent some time going through the details of that report, and concluded:

So the net result of this 68-page report, with all of its tables and detailed methodology, is that four out of the top five markets used for calculating the overall piracy loss in Europe draw on figures supplied by the recording industry itself. Those apparently terrifying new figures detailing the supposed loss of money and jobs due to piracy in Europe turn out to be little more than a *re-statement* of the industry's previous claims in a slightly different form.

So my scepticism was naturally high when I read the following:

In 2009, more than four out of 10 software programs installed on personal computers around the world were stolen, with a commercial value of more than $51 billion. Unauthorized software can manifest in otherwise legal businesses that buy too few software licenses, or overt criminal enterprises that sell counterfeit copies of software programs at cut-rate prices, online or offline.

However, the impact of software piracy goes beyond revenues lost to the software industry, starving local software distributors and service providers of spending that creates jobs and generates much-needed tax revenues for governments around the world.

Curbing piracy has the reverse effect, sending ripples of stimulus through the whole information technology (IT) economy. And lowering piracy faster compounds the benefits. “The Economic Benefits of Reducing Software Piracy” documents these gains in 42 countries, which represent 93 percent of the global market for PC software. Below are the key findings:

Reducing the piracy rate for PC software by 10 percentage points — 2.5 points per year for four years — would create $142 billion in new economic activity while adding nearly 500,000 new high-tech jobs and generating roughly $32 billion in new tax revenues by 2013.

On average, more than 80 percent of the benefits of reducing PC software piracy accrue to local economies — and in some cases it is more than 90 percent.

Front-loading the gain by lowering piracy 10 points in the first two years of a four-year period would compound the economic benefits by 36 percent, producing $193 billion in new economic activity by 2013 and generating $43 billion in new tax revenues.

Software has a ripple effect on the broader IT industry because selling, servicing and supporting software creates downstream economic activity. In the 42 countries covered in the study, the commercial value of unlicensed PC software put into the market amounted to $45 billion in 2009, resulting in total losses of revenue, employment and taxes from related sectors in excess of $110 billion.

Clearly, concerted action to ensure strong protection for intellectual property (IP) and to reduce software piracy should be a priority for governments — sooner rather than later.

Clearly...or maybe not. First, we need to examine where all these big numbers come from, and then pick apart the assumptions that lie behind them. This turns out to be the usual rabbit-hole stuff, as one report leads to another.

The main “Piracy Impact Study: The Economic Benefits of Reducing Software Piracy” [.pdf] turns out to be just a summary. Tucked away at the end is the following:

For more information about “The Economic Benefits of Reducing Software Piracy” and a full description of the methodology,see the full report at www.bsa.org/piracyimpact.

Following that link brings us to a slightly longer re-statement [.pdf]] of the first study, with a little bit of methodology tacked on at the end in compressed form, and the following statement:

A detailed explanation of that methodology is available at www.bsa.org/globalstudy.

Proceeding once more to that further study [.pdf], we find yet more words, and finally, towards the end, some details of the methodology.

The basic method for coming up with rates and commercial value of unlicensed software in a country is as follows:

1.Determine how much PC software was deployed in 2009.

2.Determine how much PC software was paid for/legally acquired in 2009.

3.Subtract one from the other to get the amount of unlicensed software.

A couple of points. To its credit, the main research, carried out by IDC, *does* take account of free software in its calculations. Indeed, it puts it at a rather impressive 12-22% of the market. Note, too, that it refers to “unlicensed software”: this is the correct term, not the “stolen” used by the BSA in their trumpeting of the results. It's the old copyright infringement versus theft argument that BSA still doesn't seem to understand, but IDC does.

The report does make a mistake when it says:

$ Commercial Value = #Unlicensed Software Units)/Average System Price

It obviously means these should be multiplied together, but I assume that is just a slip. Moreover, this looks reasonable enough:

The commercial value of unlicensed software, which BSA previously referred to as “losses”, is the value of the unlicensed software as if it had been sold in the market. This is calculated using the same blend of prices used to determine the average system price, including: retail, volume license, OEM, etc. In practice, because of the many methods of deploying software, the average system price is lower than retails prices one would find in stores.

So far, so good, then. The problem, I think, comes in the analysis of what would happen if piracy were reduced – in other words, if people stopped using unlicensed software, and paid for licences instead.

One obvious problem is that some might well choose to do without, or to use free software, rather than pay not inconsiderable sums for licences; but for the sake of argument, let's assume that's a small factor. Instead, I want to focus on the following section (from the last report linked to above):

Since 2002, IDC has conducted research with BSA on the economic benefits of lowering piracy – in terms of additional jobs, new local revenues and additional taxes generated. These studies have shown that the benefits to local governments are more significant than just replacing unlicensed software with licensed software.

One thing that is always omitted in these analyses is the fact that the money *not* paid for software licences does not disappear, but is almost certainly spent elsewhere in the economy (I doubt whether people are banking all these "savings" that they are not even aware of.) As a result, it too creates jobs, local revenues and taxes.

Put another way, if people had to pay for their unlicensed copies of software, they would need to find the money by reducing their expenditure in other sectors. So in looking at the possible benefit of moving people to licensed copies of software, it is also necessary to take into account the *losses* that would accrue by eliminating these other economic inputs.

One important factor is that proprietary software is mainly produced by US companies. So moving to licensed software will tend to move profits and jobs *out* of local, non-US economies. Taxes may be paid on that licensed software, but remember that Microsoft, for example, minimises its tax bill in most European countries by locating its EU headquarters in Ireland, which has a particularly low corporate tax rate:

In November 2005, The Wall Street Journal wrote that "a law firm's office on a quiet downtown street [in Dublin, Ireland ] houses an obscure subsidiary of Microsoft Corp. that helps the computer giant shave at least $500 million from its annual tax bill. The four-year-old subsidiary, Round Island One Ltd., has a thin roster of employees but controls more than $16 billion in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of the country's biggest companies, with gross profits of nearly $9 billion in 2004."

So in addition to causing money to be taken out of the country (and hence the local economy), licensed software would probably also bring in far less tax than money previously spent on local goods and services, which would generally pay the full local taxes.

Another factor that would tend to exacerbate these problems is that software has generally had a higher profit margin than most other kinds of goods: this means any switching from buying non-software goods locally to buying licensed copies of software would reduce the amount represented by costs (because the price is fixed and profits are now higher). So even if these were mostly incurred locally, switching from unlicensed to licensed copies would still represent a net loss for the local economy.

Similarly, it is probably the case that those working in the IT industry earn more than those in other sectors of the economy, and so switching a given amount of money from industries with lower pay to IT, with its higher wages, would again *reduce* the overall number of jobs, not increase them, as the report claims.

IDC also suggests two other reasons why unlicensed software costs more than licensed:

Business and consumers waste time and money working with faulty and unsupported software.

For users, using unlicensed software entails not just legal risks, but also security risks

Of course, the idea that "official" software from companies like Microsoft is exempt from such "faults" and "risks" is droll, to say the least: licensed proprietary software is probably plagued with malware and affected by downtime almost as much as unlicensed versions (just ask users...)

So although the IDC numbers turn out to be reasonable enough, the conclusions drawn from them are not. Reducing software piracy will not magically conjure up those hundreds of billions of dollars of economic growth that the BSA invokes, or create huge numbers of new jobs: it will simply move the money around – in fact, it will send more of it *outside* local economies to the US, and reduce the local employment. And it certainly won't do anything to ameliorate the quotidian problems of poorly-written software...

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